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The Concept of Mudarabah

Abdur Rashid Mirza

Univers i ty of Laho re

School of Acco untancy and Finance

Lecture n o.04

Financia l Engineer ing and Is lamic Finance (Product and Services)

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Definition

This is a kind of partnership where one partnergives money to another for investing in a

commercial enterprise. The investment comes from the first partner

who is called Rabb-ul-Maal (Investor)while the management and work is an exclusive

responsibility of the other, who is calledMudarib (Working Partner) and theprofits generated are shared in a predetermined

ratio.

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Types ofMudarabah

1. Al Mudarabah Al Muqayyadah

(Restricted Mudarabah)

1. Al Mudarabah Al Mutlaqah(Unrestricted Mudarabah)

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Al Mudarabah Al Muqayyadah(Restricted Mudarabah)

Rabb-ul-Maal may specify a particularbusiness or a particular place for themudarib, in which case he shall invest themoney in that particular business or place.

This is called AlMudarabah Al Muqayyadah(restrictedMudarabah).

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Al Mudarabah Al Mutlaqah(Unrestricted Mudarabah)

Rabb-ul-maal gives full freedom toMudarib to undertake whatever

business he deems fit, this is calledAl Mudarabah Al Mutlaqah(unrestrictedMudarabah)

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Authority of Rabb-ul-Maal

Rabb-ul-Maal has authority to:

a) Oversee the Mudaribs activities andb) Work with Mudarib if the Mudarib

consents.

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Different Capacities of theMudarib

1. Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets requiredtherewith are held by him as a trust.

2. Wakeel (Agent) : In purchasing goods fortrade, he is an agent of Rabb-ul-maal.

3. Shareek (Partner): In case the enterprise earnsa profit, he is a partner of Rabb-ul-maal whoshares the profit in agreed ratio.

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4. Zamin (Liable): If the enterprise suffers a

loss due to his negligence or misconduct,he is liabel to compensate the loss.

5. Ajeer (Employee): If the Mudarabah becomesVoid due to any reason, the Mudarib isentitled to get a fee for his services.

Different Capacities of theMudarib

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Capital of Mudarabah

The capital in Mudarabah may be eithercash or in kind. If the capital is in kind, its

valuation is necessary.

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Distribution of Profit & Loss

Apart from the agreed proportion of the profit,

the Mudarib cannot claim any periodical

salary or a fee or remuneration for the workdone by him for theMudarabah.

TheMudarib &Rabb-ul-Maalcannot allocate alump sum amount of profit for any party norcan they determine the share of any party at aspecific rate tied up with the capital.

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EXAMPLE

If the capital is Rs.100,000/-, they cannot

agree on a condition that Rs.10,000 out ofthe profit shall be the share of theMudaribnor can they say that 20% of the capital

shall be given toRab-ul-Maal. Howeverthey can agree that 40% of the actual profitshall go to theMudarib and 60% to theRab-ul-

Maal or vice versa.

Distribution of Profit & LossPercentage of Actual Profit

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If the business has incurred loss in sometransactions and has gained profit in

some others, the profit shall be used tooffset the loss at the first instance, thenthe remainder, if any, shall be

distributed between the partiesaccording to the agreed ratio.

Distribution of Profit & Loss

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Termination ofMudarabah

Mudarabah can be terminated any time byeither of the two parties by giving notice.

If Mudarabah was for a particular term, itwill terminate at the end of the term.

Termination of Mudarabah means that

the Mudarib cannot purchase new goodsfor the Mudarabah. However, he may sellthe existing goods that were purchased beforetermination.

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Distribution at Termination

If all assets of theMudarabah are in cashform at the time of termination, and some

profit has been earned on the principalamount, Profit shall be distributedbetween the parties according to the

agreed ratio. If the assets ofMudarabah are not in cash

form, they will be sold and liquidated so

that the actual profit may be determined.

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If there is a profit, it will be distributed

betweenMudarib and Rab-ul-Maal.

If no profit is left, Mudarib will not get

anything.

Distribution at Termination

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Collective Mudarabah

Collective Mudarabah means a joint

Pool created by many investors and handled

over to a single Mudarib. Collective Mudarabah creates two different

relationships:

Relationship between investors, which isShirkah or Partnership.

Relationship of all the investors withmudarib, which is mudarabah.

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When Mudarib is a JuristicPerson

Who is the Mudarib?

Shareholders?

Management or Directors?

Expenses of Mudarabah

Direct expenses are borne by the

Mudarabah pool.